Week In Review; 50 DMA Line Is Resistance

Friday, May 14, 2010
Stock Market Commentary:

Continuing in their recent trend, the major averages rallied during the first half of the week only to fall hard during the latter half. For the week, volume totals were lower than the prior’s week’s totals which indicated distributional pressure from institutional investors. In addition, all the major averages failed after a light volume rally to their 50 DMA lines which currently serves as formidable resistance. Breadth was negative as decliners trumped advancers by a large margin as the market encountered resistance.

Monday-Wednesday Light Volume Rally To 50 DMA line:

Stocks surged around the world after European policy makers announced a $1 trillion bailout package designed to end the region’s sovereign-debt crisis, curb contagion woes, and save the euro. Initially, the euro opened higher but negatively reversed after the bears showed up and quickly sent the euro lower. The fact that the euro could not rally on bullish news begs the question, when will it rally? By Friday, the euro fell a whopping 7 handles (from 1.30-1.23) and closed near its lows for the week

Stocks closed mixed on Tuesday after encountering resistance near their respective 50 DMA lines. Again, it was a bit disconcerting to see volume recede as the major averages advanced. In  a surprising turn of events, David Cameron was named the new Prime Minister of the United Kingdom after Gordon Brown unexpectedly resigned. Cameron’s new role helped the conservative movement regain power after a 13-year hiatus. David Cameron is believed to be nearing an agreement on forming a coalition government with Nick Clegg’s Liberal Democrats. Negotiators for both their parties met after talks broke down between Brown’s Labour Party and the Liberal Democrats.

The major averages posted unanimous gains on Wednesday, extending their new rally effort after a flurry of healthy headlines from Europe were released. The Dow Jones Industrial Average and the tech-heavy Nasdaq Composite Index both closed above their respective 50-day moving average (DMA) lines leaving the benchmark S&P 500 Index and the NYSE composite below that important level. The fact that all the major averages did not close above their short term averages suggested a negative divergence was occurring and the fact that volume receded for a third straight day was also a worrisome sign.

Thursday- Friday: The Bears Return As The Market Remains In A Correction:

The bears returned from a three day hiatus on Thursday afternoon and erased Wednesday’s gains, sending the DJIA and the Nasdaq composite back below their respective 50 DMA lines. In addition, volume was heavier than the recent advance which was not a healthy sign. The highly influential financial group continues to lag its peers, evidenced by the lackluster action in several key names. Most of the major financial firms are now trading below both their respective 50 DMA and 200 DMA lines, which is another ominous sign. Stocks got smacked on Friday after news spread that French President Nicolas Sarkozy threatened to leave the EU if the trillion dollar bailout was not passed.  Again, volume rose as the major averages fell. What does all this mean for investors? Simple, the market is in a correction which reiterates the importance of adopting a defense stance until a new rally is confirmed. Trade accordingly.

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